When people want to take more risk, they dump yen. And for the
first time in a while, people are feeling good.

That being said, Taylor doesn't expect this to last, and he
expects the yen to hit new highs later this year.

Here's his commentary.

Ever since the financial crisis began in 2007, the yen has been
stronger than it should be. The yen has been negatively
correlated with the business cycle, just like the dollar is, but
even more so. When the financial system almost collapsed,
hedge fund managers and other yen borrowers had to liquidate
their assets and buy yen to repay their loans, resulting in a
strong yen. After the Fed and others stimulated the global
economy, the yen should have weakened, but the weakness was
minimal - something was different. Two things had changed.
Global growth was so forced and feeble that the Japanese did not
invest enough offshore - they kept too much money at home - and
hedge fund managers could borrow dollars for even less than it
cost to borrow yen. The dollar was safe too as the Fed
didn't want it to strengthen. Most of the missing outflow was
Japanese, especially recently, as there is a school of thought
among some hedge funds that Japan is very close to a major
financial collapse, so as the Eurozone crisis deepened, they are
establishing yen shorts to wait for Japan's turn.

They will have a long wait. Although Japan's government
debt is estimated around 220% of GDP, most of it is owned
domestically, and netting currency reserves against its
liabilities, their sovereign debt position looks more like the US
or the UK. When private assets are included, it is clear
why the yen is so strong during troubled times. We must
conclude 2011 was bad enough that Japanese investors were more
worried about return of capital than return on capital.
Only at the start of February did global things look good enough
that the yen began to weaken. The good US numbers mean US rates
will climb and higher rates mean a higher dollar. The
defensive position taken by most Japanese investors, with US
assets hedged, means they are short dollars. Their lifting of
hedges implies large yen sales, a trend that will run until
exhaustion when hedges are removed and the dollar is much
stronger. However, it is more likely US growth disappoints,
resulting in high risk, more Japanese repatriation and hedging,
and a stronger yen - maybe as strong as 2008. By early
fall, the yen should be at all-time highs. A reversal of recent
yen weakness will be the trigger that the US economic numbers are
headed lower. However, if the recent trend away from consumer-led
growth continues, reserve growth will extend its slow decline
that began in August, and the lack of Asian money to buy US
sovereign debt will drive US rates higher and the dollar
up. Although this bout of weak yen should end soon, after a
period of yen strength, it should reappear in a more virulent
form by year-end.

Bottom line: At least for now: What drives the yen is the
alternation between risk on and risk off, whether Japanese
investors are investing abroad, and whether hedge funders are
borrowing in yen to buy various assets. When people are investing
more and taking risks, that's yen negative.

And of course, nobody in Japan is complaining. Manufacturers
appreciate the breathing room, and the Nikkei index is doing just
fine in the midst of the selloff.